Setting the Context for Regulating Pensions
The Pension Fund Regulatory & Development Authority (PFRDA) was first established in 2003 as the Interim Pension Funds Regulatory and Development Authority by Gazette notification in tandem with the Government of India’s decision to introduce a new restructured pension system for entrants to central government service. The new pensions system was to be called the National Pension Scheme (NPS). It was also subsequently made available on a voluntary basis to all persons including self-employed professionals and workers in the unorganised sector. The Interim Authority was set up to regulate, promote and ensure the orderly growth of the pension market, but in effect this was limited to the NPS as other pension systems (including the Employees Provident Fund, as well as a number of other statutory, mandatory and voluntary pension systems) were already covered by other legislation and governance structures.
PFRDA was constituted in its present form in 2014 through the Pension Funds Regulatory and Development Act, 2013. Its scope of activity was expanded to include other pension schemes that are registered under it and not covered by any other statute. In particular this includes the Atal Pension Yojana, a government pensions scheme that provides a guaranteed minimum income to eligible unorganised sector workers.
PFRDA and NPS are of great salience for government employees. Until 2004, their pension schemes were managed on ‘defined benefit’ principles, or in other words, that they had fixed pension benefits which were calculated in the basis of their last drawn salary, years of service etc., and were in addition ‘cost-indexed’ at current rates. The establishment of PFRDA and NPS have signaled the transition in India from ‘defined benefit’ to ‘defined contribution’ schemes. This means pension benefits are directly linked to individual pension accounts, to which both employees and employees contribute during the term of employment. The quantum of benefit is however variable and dependent on the performance of the fund. Central government employees (except armed forces) who came into employment after 2004 have been mandatorily enrolled in the NPS. The state governments have also subsequently transitioned their pension systems to NPS as well. The NPS, and Atal Pension Yojana are open to the non-government subscribers as well, but it is not mandatory for them and is one among several investment options for them.
PFRDA and NPS also reflect the transition of government pension systems from a public-administered pension system to a system with a number of private operators, and one in which the benefits available to government employees was closely connected with the performance of markets.
The NPS is both mandatory (for most of its subscribers) and partly privatised. The central role of PFRDA is therefore to ensure stability and orderly growth of this system, and to protect subscribers from fund mismanagement, and from high rates and malpractice by intermediaries.
According to official data, as of November 2021, there are 76.8 lakh total members of central and state government employees in NPS, and the total Assets Under Management (AUM) for the central and state government schemes is INR 5.5 lakh crore. In addition, total membership under private NPS schemes stands at 32 lakh individuals, whereas their AUM is INR 1 lakh crore. Total membership under the Atal Pension Yojana is 3.2 crore individuals, and the AUM is INR 19 thousand crore.
Scope and Design of PFRDA Regulation
PFRDA is responsible for protecting the interests of pension fund subscribers. For this, it has power to regulate ‘intermediaries’. Pension funds are included within the definition of ‘intermediary’ in the PFRDA Act. Intermediaries also include central recordkeeping agencies, pension fund advisers, retirement advisers, points of presence and all other persons and entities connected with collection, management, recordkeeping and distribution of accumulations.
The NPS Trust, which was established by the Authority in 2008 under as per the provisions of the Indian Trusts Act of 1882 for taking care of the assets and funds under the NPS is also an intermediary which is regulated by NPS. The powers, functions and duties of NPS Trust are laid down under the PFRDA (National Pension System Trust) Regulations 2015, besides the provisions of the Trust deed dated 27.02.2008.
The Authority is responsible for registering intermediaries, and to make regulations for eligibility norms, including minimum capital requirement, past track-record including the ability to provide guaranteed returns, costs and fees, geographical reach, customer base, information technology capability, human resources etc. Further, the Act provides that intermediaries can only carry out business activities in accordance with the terms of the certificate of registration issued by the Authority. The Authority has range of powers to inspect and investigate the operations of intermediaries and to enforce its regulations and directions.
The Authority has adjudicatory power to decide on inquiries made in respect of intermediaries. It can also adjudicate disputes between intermediaries, and between intermediaries and subscribers.
The Authority is statutorily required to undertake steps to educate subscribers and the general public on issues relating to pension and retirement savings.
In addition, for NPS, the Authority also has some roles in relation to the actual management of the pension fund. It makes key appointments to the NPS Trust, including its Chairperson, CEO and Trustees. This has however been considered a conflict of interest, and a clear delineation of powers between the regulator and the NPS Trust is considered necessary. The Union Budget 2019-2020 proposed the separation of the NPS Trust and the PFRDA in view of this issue. It is understood that an amendment to the PFRDA Act is awaited in relation to the separation of the Trust (operational supervisor) from the PFRDA (legal regulator).
Issues and Challenges
Worldwide, pension system supervisors and regulators face the challenge of having high administrative charges for private pension funds, which leads to poor rates of return for pension fund members. There are often detrimental rules which govern the withdrawal of accumulated funds at retirement, and the risk of potential mis-selling when the retail channel is used to ‘sell’ financial products like pension plans. In this perspective, NPS is considered one of the most low-cost pension system designs in the world. However, consistent regulatory interventions are necessary to ensure that the NPS can continue serving the old-age income needs of individuals and protect their interests on a sustainable, reliable and cost-effective basis.
However, much more needs to be done to expand the low coverage of pensions in India. Out of an estimated Indian workforce of approximately 47 crore individuals, around 10.2 crore are covered under mandatory and voluntary pension schemes. In other words, only 21-22% of India's workforce is covered by some form of pension plan. While pension coverage has incrementally risen in the past decade, a very large fraction of the working population still remains outside the formal pension system.
Expert committees in the past have highlighted the low pension participation rates among households in India - these include the Reserve Bank of India Committee on Household Finance, and some committees of the PFRDA. Risks to income security in old age are increasing due to a few reasons. First, the shifting demographic patterns in the country including the rise of the nuclear family, second, the high levels of unsecured debt (due to borrowings from non-institutional sources such as moneylenders) when approaching retirement age, and third, an increase in the elderly cohort. The general absence of effective formal sources of retirement income exposes the elderly cohort to economic shocks in the non-working segment of their lives.
The Atal Pension Yojana was established with a view of addressing this challenge, especially for unorganised sector workers. However, the challenges to increasing pension coverage in the low-income and heterogeneous unorganised sector in India are rather complex. The design of the savings instrument has to be customised to suit a financially semi-literate individual who may be unable to make regular contributions.
Further, India’s pension sector suffers from a fragmented regulatory landscape and exercise of regulatory oversight. While the NPS and Atal Pension Yojana are ‘regulated’ by PFRDA, the equivalent functions for the Employees Provident Fund and other pension systems are performed by their Board of Trustees or through other governing arrangements. This has led to disparate governance standards, outreach strategies, funding patterns, and investment guidelines across various pension schemes and programmes. These issues could be addressed through a comprehensive national pension policy, but this would require significant changes across the various laws, schemes and organisational structures.
 World Bank Labor Force estimates for India (2020), URL: https://data.worldbank.org/indicator/SL.TLF.TOTL.IN?locations=IN